The Hanging Man candlestick formation, as one could predict from the name, is a bearish sign. This pattern occurs mainly at the top of uptrends and is a warning of a potential reversal downward. It is important to emphasize that the Hanging Man pattern is a warning of potential price change, not a signal, in and of itself, to go short.
The Hanging Man formation, just like theHammer, is created when the open, high, and close are roughly the same price. Also, there is a long lower shadow, which should be at least twice the length of the real body.
When the high and the open are the same, a bearish Hanging Man candlestick is formed and it is considered a stronger bearish sign than when the high and close are the same, forming a bullish Hanging Man (the bullish Hanging Man is still bearish, just less so because the day closed with gains).
After a long uptrend, the formation of a Hanging Man is bearish because prices hesitated by dropping significantly during the day. Granted, buyers came back into the stock, future, or currency and pushed price back near the open, but the fact that prices were able to fall significantly shows that bears are testing the resolve of the bulls. What happens on the next day after the Hanging Man pattern is what provides traders an idea as to whether or not prices will go higher or lower.
A hanging man is so-called because it has the shape of a man in hanging position with his legs dangling underneath. It occurs during an uptrend only and it is a very good indicator of a trend reversal to a bearish market.
How to recognise a Hanging Man: The body is at the upper end of the trend and has little or no shadow to the upside. The body has a shadow at least 2-3 times its length to the underside. The hanging man market period is preceded by uptrend periods. The colour of the body is not important to the trend reversal, other than a red hanging man is more bearish than a green hanging man.